Gloomy productivity report hides some fatal flaws

Author

Winthrop Professor and Associate Dean Research and Research Training, University of Western Australia

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Peter Robertson does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

The analysis – undertaken by the Economist Intelligence Unit - also ranks Australia second last in terms of productivity growth and has been reported in the media as “sobering” and “a wake-up call” for Australia.

But the report makes three fundamental economic faux pas that render it next to useless.

The first is that it attempts to measure economic performance by looking at a range of indicators that do not measure performance though they influence it. This is like trying to judge Master-Chef by measuring the quality of the eggs, butter and flour, rather than the cake.

Our economic “cake” is GNP per capita and the irony is that we can measure this well - much better than we can measure many of the ingredients AHRI uses, such as the “elasticity of total employment to GDP”, or “flexibility practice in telecommuting”. We don’t need to measure all these factors to understand how well the economy is doing. The proof of the cake is in the eating.

Compounding the folly, the report tries to aggregate indicators such as these into an overall index. This is, of course, like adding apples and oranges, or to extend the analogy, cocoa and sugar. Children can add them and stir them but it doesn’t necessarily make a chocolate sponge. Practically no meaning can be given to the aggregate index they construct.

The third faux pas is the worst – the selection of indicators. A key ingredient of their mixture of economic indicators is labour costs. Australia is apparently (according to some journalists who have had access to the underlying model) ranked low because of its high labour costs. Conversely the authors of the report seem to believe that Namibia and Nigera have better economic performance because of their low labour costs.

This absurdity arises because they confuse “competitiveness” – which sounds like a good thing – with “low wages” which are bad. The resolution is clearly that being competitive is good if it’s achieved through high productivity. Those firms and countries that have high productivity will pay high wages. Those that are unproductive must pay low wages. Thus, one of the report’s key indicators of “economic performance” is, in fact, a measure of under-performance.

Australia is also marked down for having low productivity growth. Yet economists understand that productivity is like the Higgs Boson. The theory is all there but it’s impossible to measure accurately. Australia’s productivity numbers are all over the place for many reasons, but partly because of high investment in mining and the long lead times and lags in that sector. There is a two-speed economy, but the overall average speed is still very fast.

Indeed, Australia’s economy has been among the fastest growing OECD economies over the last two decades and remains one of the richest. That’s really all there is to it.

The answer to the question, “how strong is Australia’s economic performance?”, does not require a mysterious set of formulae and statistics. It is something the Australia Bureau of Statistics reports on four times a year in its quarterly national accounts. When our income per capita rises, which it has been doing, it is because of increases in labour productivity.

We can of course look at other indicators that identify weaknesses and areas needing reform. Those interested in what Australia can do to enhance its economic performance need look no further than the Productivity Commission’s annual report.

It may not be riveting, but it has the advantage of being well reasoned and intelligible.